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Responding to Low Cost Countries1

Dave Cranmer, Phase 3 Consulting LLC

There has been a lot of attention devoted lately to how large, multi-national firms are moving operations and jobs to lower cost countries, China and India principally. This is part of a trend that's been going on for years. Until recently, most outsourcing was done to domestic, in many cases, local plants and firms. The basic idea was that the large firm could buy many things of higher quality and lower price than they could make them themselves. As companies outsourced more - more parts, more components, more systems - they continued to look for lower cost sources of supply. With the advent of the North American Free Trade Act, Mexican and Canadian companies became easier places with which to do business. As the costs of telecommunications and transportation have decreased, the rest of the world became more accessible - both as a market to sell to and as places from which to source.

This is true not just of products, but some services as well. Call centers and computer programming are just two examples. Today, you can find reasonably priced service companies to provide you with first-rate programming talent or knowledgeable, English-speaking staff who are available 24/7. Some countries ship work to the U.S. - legal and financial services, for example, and those services are provided here more frequently than elsewhere. It's a brave new world. Whether you're ready or not, you're a participant in the global marketplace. As a consumer, it's easy. Generally, you look for the best quality at the lowest price - value. Look at the labels. Where does it come from? Frequently, it's not American made.

That's today's global reality. Labor costs in Taiwan are about 1/3 of U.S. costs, India 1/4 and mainland China is about 1/5. They're also working in facilities that are state-of-the-art, or pretty close to it. And, it's not just low-cost labor. There are lots of bright people around the world. Many scientists, engineers, and business people were trained in America's best universities and have moved back to their native countries. They see opportunities overseas to build businesses they couldn't build here. The American Way has been exported too, and that means competition can come from anywhere, not just down the street. With cost advantages of at least 20%, you can lose customers overnight to global competitors.

In this kind of environment, how do you compete? If your business strategy is based on being the lowest cost producer, you're in a race to the bottom and you might want to rethink your strategy. Basically, there are a handful of strategies you can choose, but successful companies are adapting themselves and their strategies to offer higher value to customers. They're moving from being commodity producers of high volume, simple products to specialty producers of more complex products and they're getting choosier about their customers.

Ask yourself - What value do I bring to my customers? Is it in design, service, being close to the market, or something else? If you make a product, take a good look at the ones that require tight tolerances, are difficult to manufacture, or have critical reliability requirements. Look at the processes used to make them. Are they unique processes, or do they require specialized, skilled labor that gives you an advantage? Are the products themselves unique and protected by patents? Are you doing the research and development necessary to stay ahead of the game? Are the products fashion-sensitive, and can you customize and deliver them quickly enough (and profitably enough) to take advantage of rapid changes in such a market?

Having asked yourself these product and service questions, now ask yourself about your customers. Do you have the right customers? Are they looking for just the lowest price or can you offer something more? Do they want to "Buy American"? How many different customers do you have, and should you have greater diversity in my customer base? How much of your business and profits comes from the top 20% of your customers?

Then ask about your company's operations. Are you as cost competitive as you can be? Should you have your own overseas sources to get the lowest costs possible? Should you become a global player, and, if so, do you have the wherewithal - financial and personal - to change and grow your business enough to be one of those players?

Get closer to your customers. Find out what their real needs are. Add services to what you offer. Make yourself indispensable.

Let me give you one example. An Ohio-based company I know was electronic board manufacturer for a number of large companies including design and fabrication. They'd done business with each other for years. The large companies went to China about a year and a half ago, based on cost, but didn't take all the business. They asked the Ohio company to troubleshoot and rework imported boards that weren't up to snuff. As you might expect this is a very different business, and the owner was on the edge of closing the business. However, he took another look at where his products and services made a difference. He's now rebuilding his business around an industrial process control segment. This is very demanding work, even more so than what he'd been doing before. These are very abusive environments for electronics, but they also require high reliability. If everything works out the way the owner expects, his business will recover, his employees will stay employed, and his firm will be more profitable than before.
Take another look at the questions above. The answers will tell you which high value, niche products and services you should focus on. If you're a commodity or perceived as one, you're already at risk, and now is the time to make plans and act on them.

1Originally published in The Business Monthly (Howard County, Maryland), August 2004


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David C. Cranmer, President
18629 Queen Elizabeth Dr.
Brookeville, MD 20833

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